Analysis: The incredible shrinking country called America

By Thomas Mucha, GlobalPost

Tuesday, October 8, 2013

BOSTON — Well here’s an amazingly horrific statistic:

Fifty-four percent of Republicans polled by the Pew Research Center this week believe the United States government can “go past the deadline for raising the debt limit without major economic problems.”

Aside from the pure partisan pique this poll represents, this majority GOP opinion is a worrying sign that the toxicity of America’s political system is wrecking its economic standing in the world.

Make no mistake: A default of the world’s largest economy would create plenty of economic damage in the U.S. economy, on Wall Street and global financial markets, and could reverberate in almost every corner of the planet.

And, yes, the world is paying attention to the ongoing farce in Washington, DC.

Reuters columnist Alan Wheatley sums it up thusly: “The world is watching Washington’s showdown over the federal budget and debt ceiling with the same feelings of horror, disbelief and ghoulish fascination that a slow-motion car crash produces.”

The Economist, too, minced no words: “No way to run a country,” the newspaper’s latest headline blared over a photo of a very perturbed George Washington.

So why is America’s “domestic political dispute” a big deal for the global economy?

Let’s start with the U.S. Treasury market, which represents the belief by global investors that the United States is able — and willing — to pay its debts.

This is no arcane economic exercise.

The ability of the U.S. economy to attract trillions from around the world has benefitted every American by keeping our interest rates low, and of course, by allowing the U.S. government to do things like pay retirees and fund our military. It means — in economic parlance — that the U.S. dollar acts as the world’s reserve currency.

Both Japan and China — the two biggest holders of U.S. debt — are now publicly scolding America’s elected representatives for playing yet another cat-and-mouse game with the global economy.

“The U.S. must avoid a situation where it cannot pay (for its debt) and its triple-A ranking plunges all of a sudden,” Japan’s Finance Minister Taro Aso warned. “The U.S. must be fully aware that if that happens the U.S. would fall into fiscal crisis,” he casually added.

China’s money lenders are getting chippy, too.

Chinese Vice Finance Minister Zhu Guangyao says Beijing has been in talks with Washington over the coming debt ceiling limit, which U.S. Treasury Secretary Jack Lew says could come as soon as Oct. 17.

“The U.S. has a large amount of direct investment in China, and China has a vast number of U.S. Treasury bonds,” Zhu said Monday. “The U.S. is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the U.S. to ensure the safety of Chinese investments.”

It’s a big deal when your two largest foreign creditors speak out like this — and it doesn’t get any bigger than these two. China holds $1.28 trillion in U.S. Treasury bonds, while Japan owns $1.14 trillion worth of the stuff.

And, of course, President Barack Obama certainly would have heard more about America’s financial mess at this week’s APEC Summit in Bali — had the crisis not kept him in Washington.

But forget political games, reserve currency status, the role of global interest rates, the nerves of global creditors or even the Keynes v. Hegel divide that underpins much of the current crisis.

Like so many aspects of economics, the potential damage here is psychological.

For all of its faults — and lord knows there are plenty — the United States remains the most powerful economic engine the world has ever created. It overflows with great companies, great ideas, the world’s best universities and gobs of private capital.

It also — still — attracts dreamers from every country in the world who seek better lives, and better economic opportunities for their families.

This economic ideal in the United States, the pursuit of happiness in Thomas Jefferson’s words, is the real golden goose, and the real secret of America’s true strength. And, friends, this ideal is what’s at stake as Republicans and Democrats continue to skewer each other on this government program, or that spending plan.

If the world — and its own citizens — have no confidence that America’s elected leaders can somehow manage this economic marvel that generations of Americans have worked so hard to create, then the dream will indeed be over.

And then each of us will pay the economic costs that we deserve — even if 54 percent of a republic divided doesn’t yet know it.